Susanna Gallani

Subjectivity in Tournaments: Implicit Rewards and Penalties and Subsequent Performance

This study extends the literature on the tradeoffs associated with subjectivity in tournament incentive systems by describing the effects of implicit penalties (rewards), whereby workers ranked at the top (bottom) of objective performance rankings fail to receive the reward (penalty) due to managements subjective performance evaluations. Using data from a field setting where incentive contracts are structured as repeated tournaments, we find that workers respond differently to subjective versus objective awards of rewards and penalties. Additionally, workers subject to implicit rewards (penalties) exhibit performance reactions that counterbalance those of workers receiving subjective penalties (rewards), with net effects indistinguishable from zero. However, while the effects of subjective rewards and penalties reverse in the subsequent period, the performance effects of implicit rewards and penalties persist. Our study documents consequences of subjectivity that might alter the effectiveness of tournament incentives, and is relevant for the practice of incentive design.

Incentives, Peer Pressure, and Behavior Persistence

Organizations often introduce temporary incentive programs with a view of establishing long lasting behaviors. Monetary payoffs are awarded upon achievement of team goals, which measure the success of the initiative. In this study I explore whether and how organizational behavior modifications introduced via temporary incentive programs persist beyond the incentive period. In many cases, achieving team goals requires the cooperation of members of the organization external to the team and not eligible to receive the monetary award. In this study I compare the persistence of behavior modifications between subjects rewarded with a monetary award with subjects that are exposed uniquely to peer pressure. Using hand hygiene performance data from a California hospital, I find that monetary incentive are associated with higher likelihood and greater magnitude of performance improvements during the incentive period, but are relatively short lived, while implicit incentives facilitate a longer persistence of the organizational behavior modification.

Do Incentivized Behaviors Become Habits

Organizations often introduce temporary incentive programs with a view of establishing long lasting behaviors. While economic theory assumes that monetary incentives facilitate the implementation of desired practices by increasing the marginal value of performing as required, crowding-out theory predicts that monetary award programs will reduce the motivation to perform incentivized behaviors, especially after the removal of the incentive. Using hand hygiene performance data from a California hospital, I find that a focused incentive program incentivizing a behavior of repetitive nature succeeds in achieving performance improvements that last beyond the end of the incentive period. These results are in line with theoretical predictions of habit formation, where the transformation of a deliberate behavior into an automated cognitive process decouples it from the monetary value of the award. Additionally, the probability and magnitude of habit formation, as well as its persistence are positively influenced by the individual response to the incentive program.

Through the Grapevine: Network Effects on the Design of Executive Compensation Contracts

Effective design of executive compensation contracts involves choosing and weighting performance measures, as well as defining the mix between fixed and incentive-based pay components, with a view to fostering talent retention and goal congruence. The variability in compensation design observed in practice is significantly lower than it would be predicted by contracting theory. This is likely due to indirect constraining pressures, which cannot be completely explained by industry affiliation or peer group membership. I posit that network connections involving corporate boards operate as a conduit for these pressures. Using information disclosed in proxy statements of publicly traded companies, and a vectorial approach to measure compensation similarity, I predict and find that firms that are connected by board interlocks, hiring the same compensation consulting firm, or sharing a blockholder, exhibit a higher degree of similarity in the design of executive compensation contracts than what would be predicted by similarities in organizational characteristics. The relative prominence of the connectors within the respective networks moderates the network effects on the degree of compensation similarity. Finally, I show that the market responds positively to compensation similarity, although it is associated with excess CEO compensation.